Money laundering scandal-hit Westpac drags Aussie shares; NZ rises for third day

* Blue-chip banks dominate ASX losses

* Rare-earths miner Lynas surges on potential U.S. Army funding

* Energy co FAR Ltd plunges to over 5-year low on share placement (Updates to close)

Dec 12 (Reuters) - Australian equities weakened sharply on Thursday, as the country’s oldest lender Westpac Banking Corp lost over 1% as it fielded investor rage over an alleged money laundering scandal.

The S&P/ASX 200 index closed down 0.7%, or 43.8 points, at 6,708.8. The “Big Four” banks lost between 0.7% and 1.3%.

Westpac said it was “shattered” by a money laundering lawsuit over payments it unwittingly facilitated among suspected child exploiters and apologised to all affected as it faced a fire storm of shareholder criticism.

The lender has seen about A$8.6 billion ($5.84 billion) wiped off its market value in the three weeks since it was slapped with a lawsuit citing 23 million breaches of anti-money laundering laws, including accusations of enabling child exploitation payments.

Adding to woes, Westpac shareholders voted against the company’s executive pay plans for a second year running.

Separately, Westpac and Australia and New Zealand Banking Group were excluded from a federal contract for a government home-loan scheme, while New Zealand’s central bank said ANZ’s local unit needs to improve its internal risk controls.

Amid the banking storm, the U.S. Federal Reserve signalling that borrowing costs will not change anytime soon did little to improve sentiment in Australia.

Energy units retreated 0.5%, with sector heavyweight Santos Ltd down 0.2%.

Oil and gas explorer FAR Ltd plunged more than 24% to its lowest close since 2014 as it announced the completion of a A$146 million placement to fund development of a Senegal oil field project.

Elsewhere, Lynas Corp, the world’s only major rare earths producer outside China, jumped 9.7% and was the top gainer on the ASX benchmark, after Reuters reported that the U.S. Army plans to fund construction of rare earths processing facilities in the United States.

Meanwhile, New Zealand’s benchmark S&P/NZX 50 index ended higher for the third straight session, adding 0.1%, or 16.02 points, to 11,307.98.

Restaurant Brands New Zealand Ltd, the best performer on the bourse, gained 4%.

$1 = 1.4736 Australian dollars Reporting by Devika Syamnath in Bengaluru; Editing by Rashmi Aich